Industry in the USA again surprises (Afternoon analysis 4.02.2020)

On Tuesday, the market was dominated by positive sentiment. The dollar maintained a relatively strong condition, but the improvement in global sentiment supported the zloty. The EUR/PLN exchange rate dropped to 4.27.

Favourable data, positive sentiment

Market quotations of some instruments or indexes may suggest that the virus threat is over. About an hour after the trading began, the USA Nasdaq composite index practically pared all the losses incurred after the threat of the disease in China came to light, and it again reached the historical records. The other main market indexes in the USA or Europe, although they did not regain all the losses, have generally reduced their scale and are also close to the recent highs.

This is partly the result of "buying the dip" (purchase of strongly depreciated assets), and partly the better-than-expected results of large listed companies and the positive surprise in the US industry on Monday (the ISM activity index has been the highest in six months). Although there are further media reports of an increase in the number of identified cases of coronavirus, with the exceptions that its isolation is practically limited to the territory of China and the extraordinary prevention measures introduced by other countries seem to calm the market down. If there is no sudden and unfavourable return on this issue, it is likely that only significantly weaker-than-expected macro data from major economies could significantly worsen market sentiment and increase risk aversion.

The positive sentiment was also supported by another surprise from the US economy today. Machinery orders (excluding variable transport orders) in December increased by 0.6% on a monthly basis, the fastest pace since May 2018. This translated into significant support for the dollar, which remains in relatively good condition given Friday's weakening caused by a strong drop in US Treasury bond yields. After reaching nearly 1.11 on Friday, the EUR/USD exchange rate is again closer to 1.10 (around 1.1033 in the afternoon). The main currency pair is therefore closed in the well-known 1.10-1.11 range, which also supports relative stability in the currency market. Reactions to recent unexpected events are slightly less emotional than, for example, on the equity market, bonds or precious metals.

A marked improvement in sentiment in the broader market, even with a slightly stronger dollar had a positive effect on the zloty today. The zloty's basket has been appreciating strongly since the early hours of the morning, the EUR/PLN exchange rate in the afternoon fell to the 4.27 boundary, even though as recently as yesterday we observed levels above 4.30. Further improvement in sentiment may support the zloty and pared the losses of the last two weeks. On the other hand, there is still a risk of a significant deterioration in sentiment if it turns out that the impact of the coronavirus on the global economy is stronger than currently estimated by economists.

Tomorrow's preview

Before midday, the PMI data from the service sector will be published. For the eurozone, these will be the final data, and changes to the preliminary readings are not expected. On Monday, however, analogous data from the industrial sector has slightly exceeded expectations, and a similar scenario with services could support the currently observed improvement in market sentiment. In the morning, the PMI data from the services sector (as well as aggregate data) for the UK will also be available. The pound is currently under supply pressure due to slightly confrontational rhetoric on the negotiations of the UK trade agreement with the EU, although the appreciation of the British currency after the Bank of England's statement was also somewhat exaggerated, so some of this movement is also a reaction. Positive PMI data for January may confirm the upward trend in the economy and slightly strengthen the pound.

In the afternoon, there will be three more important readings on the US economy. At 2:30 p.m. ADP will publish data on the change in employment in the non-farm sector in January. The median of expectations indicates their increase by 158k, and they may suggest to market participants what they can expect from Friday's official data from the Labor Department. A quarter later, we will see the US trade balance data in December, where the deficit is expected to rise to 48.2 billion USD (from 43.1 billion in November). Reaction to this reading may be limited, and if ADP does not deviate strongly from the consensus, market attention should focus on ISM data from the services sector. A similar reading for the industry on Monday surprised the market with the highest level in six months and was partly responsible for improving sentiment in the broader market. Confirmation of this trend could also further strengthen sentiment and the dollar. The consensus indicates an increase of 0.1 points in January to 55.1 points.